Citi’s lesson from history


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The US bank recovered from a similar crisis in the early 1990s. But this time around it lacks strong leadership.

Euromoney's past coverage of Vikram Pandit

“The difference this time is that
the bank lacks leadership. Its
supine board, having permitted
a non-banker to dig it into the
hole, has now ditched him”

In 1990, then Citigroup chairman John Reed realized that the bank’s souring portfolio of bad commercial real estate loans was going to take it to the very brink of disaster. By the end of that year, tier 1 capital had fallen to 3.26% of assets, the Citigroup stock price had halved from a 20-year high to a 20-year low, banking regulators were camped in the boardroom and the legal documents for a collapse were being drafted.

Over the next two years, more problems emerged. The Office of the Comptroller of the Currency lambasted operations at Citigroup’s residential mortgage lending unit, which had pursued high-volume growth with low-documentation loans, sometimes not even checking if a borrower had any source of income. The bank was forced to re-state earnings.

What did Reed and his board do? They rolled up their sleeves and went to work.

Reed saw that, amid the deteriorating economy of the early 1990s, the most important requirement was to excel at the control aspects of banking – costs and credit quality – rather than pursuing revenue growth. He set out a two-year turnaround plan to rebuild margins and operating earnings to absorb credit write-offs; he slashed the expense ratio from 70% to 55.5% and the bank raised capital, shedding assets, famously placing shares with Saudi prince Alwaleed Bin Talal, and selling cumulative preferred stock with a hefty coupon to institutions.

The bank’s top 15 executives met for one full day every month to hammer through these plans. It was painful and difficult. But, arguably, it was Reed’s and the bank’s finest hour. And by the end of 1992, Citigroup was poised for an astonishing decade-long run-up in earnings and stock market valuation.

Bond Outlook
Another “Tuesday effect”, with Abu Dhabi buying into Citigroup, does not mean a change of fortunes. Now another securities class, “auction bonds” is contributing to the loss of confidence.

Today, the similarities are obvious. Banks have once again had to learn that chasing revenue growth with no regard for credit quality is to pursue a death wish. Once again, Citi faces the prospect of large and as yet undetermined credit write-offs at a time when it has been cutting its capital ratios – tangible equity is 2.8% of tangible assets, versus 5% for its peers – by acquiring earnings. It must consider shedding assets and possibly raising capital when its shares are trading on a 10-year low of 1.3 times book.

The difference, this time, is that the bank lacks leadership. Its supine board, having permitted a non-banker to dig it into the hole, has now ditched him. Robert Rubin, who many saw as a possible stand-in chief executive, has shown no desire for the onerous task of managing it through these challenging times, after years of availing himself of all the trappings of seniority, the huge salary and the corporate jet. Win Bischoff may be a decent cove but it’s difficult to see what he has done to qualify as the man to grapple with the near-term challenges of managing through hard-to-quantify and possibly still deteriorating on- and off-balance-sheet structured credit exposures and the medium-term challenges of charting and managing a more comprehensive restructuring.

The search for a new CEO is all the more pressing given the previous incumbent’s decision to offer so many sacrificial victims before he too succumbed.

Corporate governance, proper management accountability and avoiding payments for failure are questions Citi and the whole industry must urgently confront. The sight of senior executives disappearing with their huge pay-offs at the first signs of trouble, leaving a giant mess for others to clean up, is the most disgraceful aspect of the whole wretched business.